CANADIAN REAL ESTATE INVESTMENT FUND No.1

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1 CANADIAN REAL ESTATE INVESTMENT FUND No ANNUAL REPORT

2 The Canadian Real Estate Investment Fund No. 1 is one of Canada s largest, open-ended real estate funds. The Fund s core objective is to provide secure, growing cash flow; a hedge against inflation; low volatility; diversification and the potential for capital appreciation. TABLE OF CONTENTS 1 Portfolio Manager s Report 2 Portfolio Diversification 3 Portfolio & Tenant Diversification Performance & Activity Performance & Attribution Portfolio Business Plan 18 Independent Auditor s Statement 19 Financial Statements 23 Notes to The Financial Statements 31 Schedule of Investment Portfolio 38 Notes to The Schedule Of Investment Portfolio 43 Senior Management 44 Office Locations CAUTION REGARDING FORWARD-LOOKING STATEMENTS Any statements in this report concerning future financial performance of the Fund are subject to, among other things, risks, uncertainties and assumptions about the Fund, economic factors and real estate markets generally. They are not guarantees of future performance, and actual events and results may differ materially from those expressed or implied by forward-looking statements included in this report. CANADIAN REAL ESTATE INVESTMENT FUND NO.1

3 PORTFOLIO MANAGER S REPORT After more than 30 years with GWL Realty Advisors, the last 12 as Portfolio Manager of the Canadian Real Estate Investment Fund No. 1, I am retiring at the end of It has been a challenging and rewarding experience watching Fund real estate assets grow from $260.1 million in 1985 to $4.2 billion in Steven Marino is assuming the role of Portfolio Manager. He has nineteen years of real estate experience, fourteen with GWL Realty Advisors. For the past ten years, Steven has led the Eastern Canada investment team, executing property acquisitions and dispositions on behalf of the Fund, helping to directly shape both the portfolio and its investment strategy. Prior to that, Steven worked with the commercial asset management team with responsibility for assets in Toronto and Ottawa. For 2014, the total Fund gross return was 7.4%. The income return of 4.8%, which included both property and cash returns, was in line with recent past performance and is reflective of a well performing portfolio. The 2014 capital return was 3.1%. This property value increase reverted closer to the Fund s long-term average relative to the three previous years of material capital appreciation. The five and ten year annualized gross returns are 11.8% and 10.7% respectively. In the first quarter, the Fund acquired a shopping centre in Quebec City with a strong roster of national tenants. This property is directly adjacent to another Fund owned shopping centre, providing a dominant presence in a strategic retail node. In Q4, the Fund was able to successfully close on a forward purchase basis of two large distribution facilities leased to Home Depot for a 20 year term. The projects are scheduled for completion in These acquisitions will provide the Fund with strong, stable cash flow. Also during the year, two non-core assets were sold; an industrial building in Ottawa and a suburban office complex in Calgary. Development activity continued to be an important valueadd component of the Fund s business plan. Construction and leasing of two industrial projects in Edmonton was completed and delivered on time and on budget. The development team also completed construction of the fourth building in a suburban office complex in Toronto. Development projects not only enhance diversification and provide excellent cash flow, but also provide the potential for risk-adjusted premiums for the portfolio. Fund management continued its commitment to sustainability initiatives. From 2007 to 2013, the Fund s apartment, office and industrial components reduced greenhouse gas emissions by 28.3%. In this same period, the apartment and office portfolio reduced energy use by 11.1% and waste to landfill by 26.8%. All eligible buildings in the portfolio are pursuing Leadership in Energy and Environmental Design (LEED) and/or Building Owners and Managers Association, Building Environmental Standards (BOMA BESt) certifications. These initiatives will reduce costs and make the buildings more competitive, thereby enhancing tenant retention and attracting new tenants. The 2014 real estate market witnessed the addition of material new office supply within Canada s major central business districts. This supply contributed to softening rents, additional sublet space on the market and in general put upward pressure on near term vacancy rates. Notwithstanding this challenging environment, the asset management teams across the country had a very successful year, both in terms of new leasing activity and maintaining a high tenant retention level. The Fund s year-end vacancy rate was a very respectable 7.7%. As the Fund moves into 2015, it faces other microeconomic and macroeconomic challenges, including unemployment, volatility in Canadian commodity markets and weak GDP performance. Notwithstanding these challenges, Canada, in general, is performing well compared to other developed nations and the Fund, in particular, is well positioned to continue its record of solid performance. The portfolio has excellent diversification by type and region, with institutional quality assets, strong covenant tenants and a well managed lease expiry profile. Management will stay the course with respect to focusing on central business district office towers and well located multi-residential buildings across Canada s major cities. Management will execute property business plans with a focus on increasing cash flow and maintaining high occupancy levels. A disciplined approach to acquisitions that meet Management s criteria will remain a strategy imperative. Similarly, non-core assets will be selectively sold, with proceeds being redeployed into new acquisitions and/or development projects. David N. Rose Steve Marino Vice President, Senior Vice President, Portfolio Management Portfolio Management December 31, ANNUAL REPORT 1

4 PORTFOLIO DIVERSIFICATION ($ in millions) ($ in millions) Atlantic 1.6% $65.5 (2) Quebec 3.6% $151.8 (11) United States 0.6% $25.7 (3) British Columbia 13.4% $558.9 (14) Multi-Family 24.5% $1,018.3 (18) Retail 9.7% $402.0 (13) Other 2.1% $89.2 (10) BY REGION at December 31, 2014 BY TYPE at December 31, 2014 Alberta 24.9% $1,035.7 (18) Ontario 54.7% $2,277.1 (61) Prairies 1.2% $49.7 (1) Industrial 13.8% $575.6 (35) Office 49.9% $2,079.3 (34) Total gross market value: $4.16 billion Total number of properties: 110 The Fund s heavier weighting in office and multi-family assets, relative to the IPD benchmark, contributed to a strong performance in Capital appreciation of the multi-family assets pushed their weighting to 24.5% in 2014 from 23.4% a year earlier. With the addition of a retail centre in Quebec, the portfolio weighting for retail and Quebec increased by 60 basis points year-on-year. OFFICE PROPERTIES RETAIL PROPERTIES MULTI-FAMILY PROPERTIES INDUSTRIAL PROPERTIES The Fund s office portfolio consists of 34 buildings distributed across seven Canadian CMAs, predominantly in downtown Toronto and Calgary. The portfolio is composed of 20 CBD office towers and 14 suburban office buildings. At the end of 2014, the CBD office holdings were valued at $1,724.7 million, while suburban offices totaled $354.6 million, or about 41.4% and 8.5% of the Fund, respectively. The Fund s retail portfolio consists of open format retail centres anchored by supermarkets, pharmacies or national tenants, providing stable cash flows from a residential catchment area. The Fund owns 13 retail properties, accounting for 9.7% of the gross portfolio market value, and is looking to increase its allocation to retail. The Fund s multi-family residential portfolio is made up of 18 core properties, of which 11 are in the Greater Toronto Area. The remainder are in Ottawa, Edmonton, Calgary and Vancouver. The Fund will look to grow its residential portfolio with new generation product located in transit-oriented nodes in major markets in The Fund s industrial portfolio includes 35 single and multitenant assets primarily in the Greater Toronto Area, along with investments in established industrial nodes in Montreal and Edmonton. The Fund will be looking to add high quality, newer generation industrial buildings across the country in 2015, along with completing its mid-bay industrial project in Edmonton. 2 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

5 PORTFOLIO & TENANT DIVERSIFICATION PORTFOLIO DIVERSIFICATION CORE PROPERTIES at December 31, 2014 CBD Office ($ in millions) Multi-Family ($ in millions) # of Properties Value % of Real Estate # of Properties Value % of Real Estate Vancouver 2 $ % Vancouver 1 $ % Calgary 5 $ % Calgary 1 $ % Edmonton 2 $ % Edmonton 2 $ % Toronto 6 $ % Toronto* Ottawa 3 $ % Central 7 $ % Halifax 2 $ % West 4 $ % Total 20 $ 1, % Ottawa 3 $ % Total 18 $ 1, % *Several are multiple building complexes 200 KENT, OTTAWA, ON 65 HIGH PARK AVE, TORONTO, ON 2014 ANNUAL REPORT 3

6 PORTFOLIO & TENANT DIVERSIFICATION TOP FIVE TENANTS BY BASE REVENUE at December 31, 2014 Office Tenant % of Total Fund Revenue Government (Federal & Provincial) $ 17,294, % Conoco Phillips Canada $ 7,096, % Invesco Canada Ltd. $ 3,075, % Ritchie Brothers Auctioneers $ 2,806, % Saipem Canada Inc. $ 2,461, % Total $ 32,735, % The diversity of the Fund s office tenant base is highlighted as the top five office tenants accounted for 14.9% of the Fund s revenue and 9.6% of the Fund area. The federal and provincial government comprised 7.9% of the Fund s revenue, 15.4% of the Fund s office area and 5.5% of the total Fund area. The nature of long-term leases and diversification of rental revenue across eight office buildings in six different cities protects the Fund s exposure to the government tenancy. Industrial Tenant % of Total Fund Revenue Ministry of Defence $ 2,145, % Kodiak Group Holdings Inc. $ 1,015, % Dover Corporation (Canada) Ltd. $ 876, % The Proctor & Gamble Company $ 626, % Smiths Detection Montreal Inc. $ 572, % Total $ 5,235, % The top five industrial tenancies account for only 2.4% of the Fund s total revenue and 3.7% of the Fund s area. The Fund s tenant diversity is emphasized by the fact that the largest industrial tenant contributed only 1.0% of the Fund revenue and less than 1.0% of the total area. Retail Tenant Annual Base Rent at Ownership Annual Base Rent at Ownership Annual Base Rent at Ownership % of Total Fund Revenue Walmart Canada Corporation $ 3,835, % Home Depot of Canada Inc. $ 968, % Cineplex Galaxy General Partner $ 760, % Best Buy Canada Ltd. $ 499, % Michaels of Canada, ULC $ 493, % Total $ 6,558, % The top five retail tenancies account for 3.0% of the Fund s total revenue and 35.0% of the Fund s retail area. The Fund s largest retail tenant, Walmart, has locations in three retail properties across Canada and makes up 1.7% of the Fund s revenue and 22.2% of the Fund s retail area. Walmart is a prominent retailer with a strong operating history. 4 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

7 PORTFOLIO & TENANT DIVERSIFICATION TOP FIVE TENANTS BY OCCUPIED AREA at December 31, 2014 Office (Total 5,910,110 Sq. Ft.) Tenant Occupied Area at Ownership (Sq. Ft.) % of Total Office Area % of Total Fund Area Government (Federal & Provincial) 901, % 5.5% Conoco Phillips Canada 246, % 1.5% Invesco Canada Ltd. 175, % 1.1% MDA Systems Ltd. 127, % 0.8% The Bank of Nova Scotia 119, % 0.7% Total 1,570, % 9.6% Industrial (Total 5,385,625 Sq. Ft.) Tenant Occupied Area at Ownership (Sq. Ft.) % of Total Industrial Area % of Total Fund Area The Proctor & Gamble Company 142, % 0.9% Kodiak Group holdings Inc. 140, % 0.9% Ministry of Defence 135, % 0.8% Mastermind LP 95, % 0.6% Dover Corporation (Canada) Ltd. 87, % 0.5% Total 600, % 3.7% Retail (Total 1,342,895 Sq. Ft.) Tenant Occupied Area at Ownership (Sq. Ft.) % of Total Retail Area % of Total Fund Area Walmart Canada Corporation 326, % 2.0% Home Depot of Canada Inc. 69, % 0.4% Cineplex Galaxy General Partner 52, % 0.3% Michaels of Canada, ULC 32, % 0.2% Best Buy Canada Ltd. 32, % 0.2% Total 512, % 3.2% OFFICE TENANT NAICS 1 DIVERSIFICATION BY OCCUPIED AREA INDUSTRIAL TENANT NAICS 1 DIVERSIFICATION BY OCCUPIED AREA Public Administration 21.7% Professional, Scientific and Technical Services 16.8% Finance & Insurance 20.7% Other 24.5% Mining/Oil & Gas Extraction 10.2% Manufacturing 6.1% Transportation & Warehousing 16.8% Wholesale Trade 20.3% Other 29.6% Manufacturing 33.3% The Fund s office properties are tenanted by a wide variety of firms, including government, financial (banks, accounting), professional (law firms, consultants) and technical services firms, which collectively occupy close to 60% of the total Fund office area. The Fund s industrial properties are 70% occupied by major transportation, warehousing, wholesale trade and manufacturing firms. Although tenants listed under manufacturing account for 33.3% of the occupied industrial area, much of that is used as warehouse space. Note: Numbers may add up to more than 100% due to rounding. 1 North American Industry Classification System (NAICS) is an industry classification system developed by the statistical agencies of Canada, Mexico and the United States. It is designed to provide common definitions of the industrial structure of the three countries and a common statistical framework to facilitate the analysis of the three economies ANNUAL REPORT 5

8 2014 PERFORMANCE & ACTIVITY RETURNS The Canadian Real Estate Investment Fund No. 1 continued to produce stable returns in The Fund s net operating income increased slightly to $204.9 million as 2013 acquisitions contributed for the full year. This was somewhat offset by the Fund s disposition of non-core assets in Ottawa and Calgary, which lowered budgeted NOI. Strong demand for Canadian real estate continued to benefit the Fund as cap rates compressed further, particularly in the residential sector. In 2014, the Fund had a gross total return of 7.4%, of which 4.8% was income return and 2.6% was capital growth. 24 YORK ST, OTTAWA, ON GROSS ANNUALIZED RETURNS (%) GROSS MARKET VALUE OF REAL ESTATE ASSETS ANNUAL REAL ESTATE NET OPERATING INCOME* COMMERCIAL LEASE EXPIRY PROFILE 7.4% 9.1% 12.5% 13.6% 11.8% 10.7% ($ millions) $3,421 $3,103 $3,031 $3,638 $3,950 $4,164 ($ millions) $235 $217 $201 $195 $206 $220 (Sq Ft in 000s) Total $12,738 sq ft (2.4%) (6.9%) 1,446.9 (11.6%) 1,533.7 (12.3%) 1,534.5 (12.3%) 1Yr 2Yr 3Yr 4Yr 5Yr 10Yr The gross total return, before fees, of 7.4% is allocated between 4.8% income return and 3.1% capital return at the property level and a loss of 0.5% for marking mortgages to market. The Fund s 2014 performance was within the range of expectations for stable returns from property in Canada, which is generally between 6% and 8% annually. The Fund s gross market value of real estate hit a new record in All asset classes saw appreciation in 2014, bringing the total value of real estate to $4.2 billion. The Fund completed two acquisitions in 2014, totaling $140.9 million. There were three dispositions that combined for $41.4 million. The multi-family assets provided the majority of the Fund s capital appreciation, increasing by 13.2%. By comparison, the retail and office sectors saw modest gains at 1.1% and 0.9% respectively. By region, Ontario assets, on average, saw the most appreciation with 5.7% over the year, followed by 2.0% achieved by the British Columbia portfolio. Net operating income (NOI)*, (excludes amortization), rose to $220.2 million up from $206.2 million in 2013, an increase of 6.8%. Including deductions of amortization, the Fund s NOI came in at $204.9 million, up from $193.9 million in The Fund s industrial acquisitions in late 2013 along with the completion of a suburban office development in Mississauga helped increase NOI in Ontario by 9.1% yearon-year. In 2014, holdings in Ontario, Quebec, Alberta and British Columbia saw NOI surpass budget by 6% or more. Total portfolio of $12.7 million square feet Lease expiry profile is well diversified with no single year representing more than 12.3% rollover. 24% of the portfolio expires more than 10 years out. Portfolio s weighted average lease term (WALT) of 5.5 years. 6 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

9 2014 PERFORMANCE & ATTRIBUTION 2014 PERFORMANCE BY ASSET CLASS By Type Return (%) Retail 6.9% Office 6.5% Industrial 5.8% Multi-Family 18.5% Other 7.3% The multi-family sector had the strongest performance in 2014 of all asset classes in the Fund with a total return of 18.5%. The sector benefited from residential assets in the GTA that delivered double digit capital appreciation. Conversely, the industrial sector had the lowest total return due to higher than expected vacancy at year-end PERFORMANCE BY REGION By Region Return (%) British Columbia 7.0% Alberta 5.7% Prairies 6.4% Ontario 11.3% Quebec 3.8% Atlantic 5.4% United States 13.0% Ontario, on the basis of impressive residential and office returns, led the Fund s total return in Canada. The Fund s small weighting in Texas saw strong gains partially due to a weakening Canadian dollar. The laggard in the Fund this year was Quebec, delivering a 3.8% total return ATTRIBUTION BY ASSET CLASS % Income % Capital % Total % of Net Attribution By Type Attribution Attribution Attribution Market Value Factor Retail 10.2% 3.0% 7.4% 9.4% 0.79 Office 54.9% 14.1% 39.2% 51.8% 0.74 Industrial 16.9% 2.4% 11.4% 16.5% 0.67 Multi-Family 18.9% 75.4% 40.7% 20.1% 2.13 Other (0.9%) 5.0% 1.4% 2.2% 0.84 Total* 100.0% 100.0% 100.0% 100.0% 1.00 As mentioned above, the impressive residential return in 2014 had an outsized impact on the portfolio s total return. Despite making up 20.1% of the Fund s net market value, residential produced 40.7% of the portfolio s total return. This calculates to an attribution factor of over 2.0, meaning it provided over twice as much of the total return than it s weighting in the portfolio ATTRIBUTION BY REGION % Income % Capital % Total % of Net Attribution By Region Attribution Attribution Attribution Market Value Factor British Columbia 12.0% 7.9% 10.4% 12.8% 0.81 Alberta 26.5% 3.7% 17.7% 26.9% 0.65 Prairies 1.5% 0.6% 1.1% 1.5% 0.74 Ontario 53.0% 88.0% 66.4% 51.8% 1.30 Quebec 3.2% (0.2%) 1.9% 4.3% 0.44 Atlantic 2.2% (0.3%) 1.3% 2.0% 0.62 United States 1.6% 0.4% 1.1% 0.7% 1.50 Total* 100.0% 100.0% 100.0% 100.0% 1.00 Ontario s weighting of 51.8% of net market value contributed 66.4% of the portfolio s total return in 2014, for an attribution factor of 1.3. Conversely, Alberta s 26.9% weighting provided only 17.7% of the Fund s return as the lower oil price slowed the pace of capital appreciation in the region. *Totals may add to less/more than 100% due to rounding 2014 ANNUAL REPORT 7

10 2014 PERFORMANCE & ACTIVITY 2014 PORTFOLIO VACANCY Net Rentable Area at Ownership (Sq. Ft.) Vacant Area at Dec. 31/14 (Sq. Ft.) Vacant % at Dec. 31/14 (Sq. Ft.) Vacant % at Dec. 31/13 (Sq. Ft.) Retail 1,466,742 33, % 3.4% Office 5,855, , % 8.1% Industrial 5,218, , % 9.5% Multi-Family 3,538,581 91, % 3.0% Miscellaneous 196, % 0.0% Total 16,276,875 1,249, % 7.1% British Columbia 1,945, , % 16.0% Alberta 2,727, , % 5.7% Prairies 168, % 0.0% Ontario 9,877, , % 5.4% Quebec 1,099, , % 12.0% Atlantic 231,637 41, % 9.9% United States 226, % 0.0% Total 16,276,875 1,249, % 7.1% The vacancy rate increased marginally year-over-year, from 7.1% to 7.7%. The largest contributor to this increase was the industrial section, which rose materially from 9.5% to 13.2%. As is often the case, a couple of large vacancies materially impacted the overall vacancy level. Leasing teams are focused on readily addressing these exposures. The other asset class vacancies have all been reduced year-over-year, which speaks to the proactive work carried out by the asset management and leasing teams. Asset Type 2014 Absorption (Sq. Ft.) 2014 Y/E Occupancy (%) Retail 12, % Office 39, % Industrial (207,629) 86.8% Multi-Family 13, % Miscellaneous 30,727 - Total (111,342) 92.3% British Columbia 58, % Alberta 6, % Prairies % Ontario (58,902) 94.0% Quebec (99,280) 80.1% Atlantic (19,086) 81.9% United States % Total (111,342) 92.3% 8 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

11 2014 PERFORMANCE & ACTIVITY LEASING CRESTWOOD CORPORATE CENTRE, RICHMOND, BC GULF CANADA SQUARE, CALGARY, AB COOLEDGE LIGHTING CRESTWOOD CORPORATE CENTRE, RICHMOND, BC The Richmond market witnessed increased activity in the latter part of 2014, with several transactions being completed. The technology and digital media industries are key demand drivers in this area. GWL Realty Advisors was able to attract a tenant to occupy 32,000 square feet of vacant space at Crestwood Corporate Centre Cooledge Lighting, new to the Richmond sub-market, and relocating from Burnaby. The leasing and property management teams worked closely with the tenant to create a space solution that gave this tenant optimal placement and layout for its departments, including options for adjacent expansion. In bringing a tenant of this size to Crestwood Corporate Centre, Fund management was able to reduce vacancy by 4.3%. The lease term begins in 2015 and runs through to 2023, providing predictable cash flow to the Fund. BAKER HUGHES GULF CANADA SQUARE, CALGARY, AB Baker Hughes is one of North America s largest oilfield services companies, equipping the oil and gas industry with products and services. Based in Houston, Texas, Baker Hughes Calgary headquarters was located in Gulf Canada Square with a lease expiring at the end of With the large quantity of office supply being added to Calgary s Central Business District, as well as the recent uncertainty in the Calgary market related to oil pricing volatility, the Fund Manager recognized the importance of proactively liaising with the tenant to negotiate an early renewal. The successful renewal of this lease retains a strong covenant tenant at Gulf Canada Square for a further five years, and affords the Fund strong, predictable cash flow ANNUAL REPORT 9

12 2014 PERFORMANCE & ACTIVITY LEASING NEW IMAGE TO COME 5160 YONGE STREET, TORONTO, ON FIRST CANADIAN CENTRE, CALGARY, ON MINISTER OF INFRASTRUCTURE 5160 YONGE STREET, TORONTO, ON The Central North Toronto market has become a very popular area for mixed use office inventory, with vacancy rates decreasing from Q3 to Q4 and absorption staying positive despite 210,000 square feet of new space coming online in the area. With the added competition for large covenant tenants, Fund management was able to secure a lease renewal with the Minister of Infrastructure for the Government of Ontario that will extend their term at 5160 Yonge Street for five years on 130,125 square feet of space (33% of the building). With this transaction, Fund management was able to maintain 96% occupancy in the building while retaining a strong covenant tenant, thus sustaining the risk profile of the property. BMO FINANCIAL GROUP FIRST CANADIAN CENTRE, CALGARY, AB The downtown Calgary office market did not finish 2014 on a particularly high note, according to Colliers Canada. With more than 4 million square feet of office space scheduled to be added to the downtown Calgary market over the next four years, and the uncertainty of the oil industry, the Fund Manager s leasing focus has been on negotiating early renewals with select existing tenants. Seeking to mitigate the risk of higher vacancy and downtime in the near future, the Calgary leasing team was able to secure the renewal of BMO Financial Group s lease for an additional five years. The covenant tenant will continue to occupy a 50,491 square foot space in the building. This transaction assists in reducing leasing risk while sustaining future income returns. 10 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

13 2014 PERFORMANCE & ACTIVITY ACQUISITIONS AND DISPOSITIONS In January, the Fund closed on a 182,557 square foot retail centre in Quebec City s borough of Beauport for $33.3 million. This acquisition helped the Fund increase its weighting in two areas that have been relatively difficult to fill for the past several years: retail and the province of Quebec. The retail centre was built in 2000, with a renovation in 2007, and is anchored by a Cineplex theatre complex. The centre is immediately adjacent to another Fund owned asset, Faubourg Beauport, allowing for leasing synergies and economies of scale in the management of the two properties. Furthermore, the centre has good access to Autoroute Felix-Leclerc and Highway 40. In December, the Fund closed on a forward purchase of a 100% freehold interest in Home Depot of Canada s future Western Canadian distribution centres. The two modern, large-bay distribution buildings will total over 1 million square feet and are leased on a long-term 20-year lease. This development will be integral to Home Depot s Canadian distribution network. This transaction will see multiple instalments paid during the course of construction, totaling $108.2 million, with completion scheduled for March MEGA CENTRE BEAUPORT, BEAUPORT, QC DEVELOPMENT The Fund uses new development as a component of the overall strategy of generating stable, risk-adjusted returns with the emphasis on control for timing, quality, specifications and leasing risks. With the completion of the South Central Business Park Phase II development in Edmonton, and with only a small extension planned for 2015, the Fund has started the development of mid-bay industrial product at Prospect Business Park in northwest Edmonton. The multi-tenant project, named 51st Avenue MidBay Phase I, totals 78,044 square feet over three units. The project is 100% committed, with two completed lease deals totaling 70,544 square feet and one remaining unconditional deal for 7,500 square feet. The $13.3 million development was completed on December 1, 2014, and was delivered below budget. The Edmonton industrial market remains tight at 1.4% vacant (3.8% availability according to CBRE). FAUBOURG BEAPORT, BEAUPORT, QC In Ontario, the Fund completed the development of 7025 Langer Drive, a 64,749 square foot suburban office building in Mississauga in August The building is currently 47.1% leased across five tenants. The project, started in September 2013, is forecasted to be below its $20.9 million budget upon leasing stabilization. HOME DEPOT SITE, CALGARY, AB 2014 ANNUAL REPORT 11

14 2014 PERFORMANCE & ACTIVITY In the City of Toronto, the Fund has begun the predevelopment process for two 25-storey residential buildings on land currently owned at Grenadier Square near High Park. The proposed buildings will include a five-storey podium that will have ground floor townhouses. The two existing underground garages will be connected, to create a common garage shared by four buildings. Upon completion, the development will add 538 new units to the site for a total number of 1,197 units. SIGNIFICANT CAPITAL PROJECTS The Fund deployed $46.1 million on capital projects, excluding developments, in This amount, at 1.1% of year-end gross market value, is below the full-year budgeted capital expenditure of $54.7 million. At Watermark Tower, a 27-storey Class A office building in Calgary, a refurbishment of the Plus 15 retail space began in the autumn of The project will modernize the common area on the Plus 15 level (unchanged since 1982), which connects to other downtown Calgary office buildings. The retail section upgrade is deferential in nature as it will enable the property to retain its competitiveness in the central business district. Upon completion, there will be a new tenant mix, an increase in usable space by 3,300 square feet and an improved aesthetic of the common area. In addition, the area will be reconfigured to facilitate a future Plus 15 connection to a new 700,000-square foot office development. The budgeted cost of the project is $2.1 million. At 4 King Street West, a 20-storey Class A office building in Toronto, an elevator modernization project got underway in the summer of The modernization of the elevators will take place over three years, with an expected completion date of December 2016 at a total cost of $1.9 million. The project will replace six passenger cabs and one loading dock shuttle freight elevator with more energy efficient models. The elevator modernization will tie in with planned renovations of the main lobby, and will assist with tenant retention at this Toronto CBD Fund asset FINANCING In 2014, 16 loans with an outstanding balance of $120.9 million, or 14.3% of the total portfolio s outstanding debt, matured. With lending terms remaining favourable, five loans were refinanced totalling $99.7 million. In light of the Fund s higher than historical average cash balance, Fund management took the opportunity to pay down $60.7 million of maturing loans. Across the entire portfolio the weighted average interest rate declined marginally year-over-year from 4.6% to 4.3% and the loan-to-value ratio decreased from 19.5% to 18.6%, well within the investment policy maximum of 35.0%. Fund policy dictates that mortgages are marked to market. While this practice adds some volatility to the Fund s return, it allows the Fund s returns to accurately reflect the inherent value of committed financing. Over the long term, as the mortgages mature, the mark-to-market nets to zero. SUSTAINABLE APPROACH Fund management continued its commitment of pursuing sustainability objectives in 2014, focusing on reductions in energy and water use, waste production, and greenhouse gas (GHG) emissions. Monitoring asset performance through analysis of high-integrity data is central to Fund management s approach to sustainability. Throughout 2014, all assets were tracked against key performance indicators, then compared to industry best practices, regional averages, and internal benchmarks, all of which are used to inform business planning objectives, while demonstrating Fund management s commitment to responsible property management practices. Fund management saw an opportunity to apply these strategies when it launched the Water Conservation and Benchmarking Program for its office portfolio in Across Canada, water rates have risen steadily over the past five years, above the rate of inflation, and water scarcity is becoming of regional importance. These risk factors led to the establishment of five-year water reduction targets and action plans for each office asset ( ). Collectively, the Fund s office assets are targeting a 9.6% reduction in water use over the next five years. This reduction is estimated to save a total of 72 million litres of water, or 28 Olympic-size swimming pools, and avoid approximately $141,000 in annual tenant utility costs. This builds on the water reduction of 8.4% across the portfolio. SUSTAINABLE RESULTS Since 2007, Fund management s sustainability strategies have led to positive sustainability outcomes. Operational improvements and capital upgrades have been identified by Fund management to achieve more efficient and stable assets that limit emissions, utility use, and waste. This performance is exemplified by various portfolio activities. The Fund s multi-family portfolio continued its proactive improvements to onsite waste management. The Grenadier Square apartment buildings adjacent to High Park, in Toronto, are notable examples. From 2013 to 2014, the monthly waste cost per residential unit decreased by over 40% and annual waste diversion increased from 30% to over 50%. These results were achieved through the implementation of new recycling programs (e.g., e-waste recycling, clothing bins), resident engagement and awareness programs, the use of a detailed waste management tracking system, and the creation of convenient access points for residents. 12 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

15 2014 PERFORMANCE & ACTIVITY GHG Emissions Intensity tco 2 e/1000 sqft Energy Intensity ekwh/sqft Water Intensity M 3 /sqft Landfill Waste Tonnes Vivere, the Fund s 10-storey, condo-style apartment complex, built in 2010 in Toronto s vibrant Yonge and Eglinton neighborhood, successfully completed energy efficiency retrofits in By installing variable speed drives on pumps and variable frequency drives on air handling systems, the building avoided approximately 50,000 kwh in annual electricity use, over 4.5 tonnes in GHG emissions (tco 2 e), and approximately $4,500 per year in tenant utility costs. The property management team also successfully obtained over $5,000 in government incentives for the project. Overall, between the years 2007 and 2014, the Fund has shown significant sustainability performance improvements, reducing greenhouse gas (GHG) emissions by 25.5%, or 22,746 tco 2 e. This is the equivalent of taking 4,789 cars off the road for one year or planting approximately 583,231 tree seedlings and growing them for 10 years. Similarly, the Fund experienced reductions to its total energy consumption (7.8%), water consumption (13.9%) and waste production (31.7%) between 2007 and SUSTAINABLE BUILDINGS Beyond operational and management practices, green certifications offer additional value to the Fund reinforcing environmental, operational, and sustainable best practices, helping to lower environmental impacts and utility costs, and enhancing occupant health and comfort. As at December 31, 2014, the Fund held 61 BOMA BESt certifications, constituting 73% of the 83 eligible properties. These include Level 4 certifications for Robson Court in Vancouver and Gulf Canada Square in Calgary, a high distinction held by only 3% of the BOMA BESt certified properties in Canada. Additionally, the 141 unit, multi-family Vivere building in Toronto won the 2014 BOMA BESt Earth Award for having the highest certification score (84%) in its category. Thirteen other Fund properties are currently in pursuit of BOMA BESt and are expected to achieve certifications in BOMA BESt is a standard set by the Building Owners and Managers Association (BOMA) and addresses six areas of building performance: energy, water, waste reduction, emissions, indoor environment and environmental management system. In 2014, four Fund assets achieved Leadership in Energy and Environmental Design (LEED ) Gold certifications under the Canada Green Building Council s rating system, Existing Buildings: Operations and Maintenance (EB:OM). To obtain LEED certification a building must achieve certain thresholds for five areas of human and environmental health, which include: water and energy efficiency; sustainable site development; materials selection; and indoor environmental quality. Each building that certified in 2014 had unique sustainability components that helped achieve its certification. For example, 269 Laurier Avenue in Ottawa achieved an Energy Star score of 96; making it more efficient than 95 percent of Canadian commercial office buildings of similar size and use within the Energy Star database. 255 Albert Street in Ottawa achieved an 81% reduction in conventional commuting trips with a number of tenants choosing to commute to work by carpooling, walking, and cycling. Built in 1982, 33 Yonge Street is a 13-storey, 571,000 square foot Class A office tower in the heart of downtown Toronto, with a good track record in sustainability. The building s waste diversion program annually diverts 76% of waste away from landfills and towards recycling or reuse. Purdy s Wharf, a three-building, 694,000 square foot complex in Halifax became the first LEED Gold EB:OM building certified in Atlantic Canada. The innovative design of the building utilizes a seawater cooling system. In addition to being a clean, renewable source of energy, the seawater system eliminates evaporative water losses that normally occur in cooling systems with towers. Additionally, the landscaping consists solely of vegetation that can be entirely sustained from natural rainfall, requiring no additional irrigation. These newly achieved certifications increased the Fund s total to nine LEED certified buildings, covering assets in excess of $870 million. The breadth of green certifications in the Fund s portfolio demonstrates Fund management s commitment to a strong, diversified portfolio where all assets are operated and maintained to high performance standards ANNUAL REPORT 13

16 2015 PORTFOLIO BUSINESS PLAN 9500 GLENLYON PARKWAY, BURNABY, BC ACQUISITIONS AND DISPOSITIONS In 2015, the Fund will continue to seek acquisition opportunities that align with its investment strategy of acquiring quality real estate holdings. Key investment criteria include location and accessibility; tenant covenant and expiry profile; building quality improvements together with the need for future capital investment; building design and efficiency, and ultimately, projected return profile. The Fund s portfolio strategy also mandates effecting diversification, both by asset class and geography, across four primary asset classes: office, multi-family, industrial and retail. The allocation mix is strategic in providing exposure to the higher return but more volatile sectors of office and retail, while complementing it with the stability and predictability of return of the multi-family and industrial sectors. Geographically, the Fund limits its principal exposure to Canada s major urban centres, thereby maximizing liquidity. Fund management will continue to selectively divest of assets that have been identified as non-core or are deemed opportunistic by virtue of the successful execution of business plans. The proceeds of these dispositions are to be redeployed into higher quality, strategic acquisitions or developments that will improve the overall portfolio. The acquisition and disposition activities of the Fund are approved by the Investment Committee of GWL Realty Advisors and the Board of Directors of The Great-West Life Assurance Company, providing additional oversight and governance. LEASING Leasing is paramount to delivering stable and growing cashflow, the Fund s core objective. The Fund closed 2014 with an occupancy level of 92.3%, marking the fifteenth consecutive year this century that it has surpassed the 90% threshold. This level of occupancy is a testament to the success of the leasing, asset and property management teams executing property specific business plans to maintain high tenant retention rates and attract new tenants. The teams leverage their collective knowledge and experience to devise business plans that articulate asset positioning and leasing strategies within the context of assessing broader market conditions. As is generally the case with most large portfolios, a handful of assets account for a disproportionate amount of vacancy, namely Purdy s Wharf (18%), Crestwood (20%) and 4600 Poirier (100%). These assets are identified as near term leasing priorities. Fund management actively manages its overall expiry profile to mitigate the potential exposure related to having excessive space expiring in any particular year. Over the course of the next five years, the Fund s largest annual exposure is 12.3% and more than 24% of the portfolio expiring more than ten years out. By managing this exposure, the Fund is able to diversify the related risk and generate stable cash flow. 14 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

17 2015 PORTFOLIO BUSINESS PLAN 7070 MISSISSAUGA ROAD, MISSISSAUGA, ON DEVELOPMENT Although the Fund is by definition a core, income-producing portfolio, it has greatly benefited from selective development. Today, properties developed by the Fund Manager, GWL Realty Advisors, represent 8% of the value of the Fund. Development allows management to select the location, control the design and quality of finishes, manage the timing of delivery relative to market conditions, and generate attractive risk-adjusted returns. Moreover, development allows the Fund to adjust its portfolio weightings by type and region, enhancing portfolio diversification while minimizing future capital spending. Similar to the Fund s acquisition program, it employs disciplined investment criteria, including pre-leasing commitments, to evaluate project desirability. The Fund s recent development successes at South Central Business Park and Prospect Business Park in Edmonton and Crossroads Corporate Centre in Mississauga confirm its adherence to these policies. As land investment generates limited income return, the Fund tends to focus its efforts on securing opportunities that can be converted into income producing property near term, thereby minimizing return dilution. In this vein, the Fund gives priority to those sites already under its control that have development potential through further intensification, as the cost of obtaining the incremental density is economically attractive. The Fund owns an interest in four such projects; notably a multi-family project in Toronto, for which it is awaiting an Ontario Municipal Board planning decision specific to two towers; an office building in Calgary for which zoning is in place for 600,000 square feet; an office building in Vancouver and a shopping centre in Montreal, both of which have rezoning work underway. While larger scale development projects such as these have material lead times, subject to appropriate market conditions, they can materially enhance the overall quality, diversification and cash flow of the Fund. CAPITAL INVESTMENT Real estate is a capital intensive asset class that requires significant ongoing investment. These investments are integral to maintaining real estate s physical integrity, preserving and creating value and contributing to long-term cash flow generation. The Fund s 2015 capital plan is the aggregate of the portfolio s 110, property-specific capital programs, as identified in each of the respective business plans. The plan is comprised of both mandatory and discretionary initiatives. Mandatory initiatives address building components that are approaching the end of their useful life and need replacement, like boilers or chillers, or those in need of major rehabilitation, such as parking garages. Discretionary initiatives are those that Fund management elects to pursue on the basis of their potentially accretive or defensive nature, such as lobby renovations and apartment suite upgrades. Within the commercial asset classes, capital is deemed either recoverable or non-recoverable from its building occupants, while in the multi-family asset class, all capital is deemed nonrecoverable due to the gross lease environment ANNUAL REPORT 15

18 2015 PORTFOLIO BUSINESS PLAN PURDY S WHARF, HALIFAX, NS The Fund s 2015 capital plan includes significant outlays related to the completion of lobby renovations and elevator modernization at 4 King Street West in Toronto, as well as food court renovations at Fifth and Fifth and Watermark Tower in Calgary. Other major capital plans across the portfolio include mechanical system replacements, balcony restorations, underground garage rehabilitation and elevator modernizations. These investments are aimed at enhancing the quality of the respective properties to both maintain and increase their competitiveness in the long term, especially in the face of significant new office inventory being introduced in select markets. CASH MANAGEMENT AND FINANCING The Fund closed 2014 with a $495 million cash position, representing 13.1% of its equity. While this balance is above the Fund s longer term average of 10%, the capital-intensive and lumpy nature of real estate is such that adequate capital is required to fund new acquisition opportunities, for building improvements and leasing capital, and to meet potential investor rebalancing requests. The Fund s cash position is a product of organic cash growth, as well the Fund s continued ability to generate strong investor interest. While larger cash balances afford the Fund the opportunity to pursue more dynamic investment opportunities, Fund management actively monitors and weighs the interim dilution to returns. 269 LAURIER AVENUE WEST, OTTAWA, ON 16 CANADIAN REAL ESTATE INVESTMENT FUND NO.1

19 2015 PORTFOLIO BUSINESS PLAN The Fund s use of leverage is a significant tool in managing its cash position as well as enhancing its return profile. The Fund may opt to pay down maturing debt during periods of high cash balances while, alternatively, it may look to secure new debt during periods of low cash balances to provide enhanced returns and flexibility. At year-end 2014, the Fund had a conservative loan-to-value ratio of 18.6%, below its longer term average of 23% and well within the Fund s mandated guideline of 35%. The Fund has five loans maturing in 2015, totaling $43 million, with a weighted average interest rate of 5.26%. Fund management will look to refinance one of the maturing loans while paying down the remainder. In addition, the Fund will explore the potential to participate in today s low financing rate environment by considering blend and extend opportunities related to 2016 expiries, as well as selective financings of presently unpledged multi-family and covenant tenant assets, which generate the most attractive terms. Similar to the Fund s lease expiry profile, the Fund manages its financing to ensure it has both strong lender and expiry profile diversification, thereby mitigating potential exposures. Risk is further mitigated by ensuring all financing has recourse limited to the property, in accordance with the Fund s policy. LOOKING FORWARD As we look towards 2015, global economic uncertainty, together with volatile commodity pricing and a rapidly evolving retail landscape, provide a challenging environment. The Fund has consistently delivered strong performance over the course of its 34 year existence. As the Fund moves forward under new stewardship, it will leverage the strong foundation constructed by previous management s assembly of a quality, well-diversified income-producing portfolio. Fund management remains committed to adhering to the strategy of acquiring institutionalgrade, well-located and tenanted properties; maintaining a conservative loan-to-value ratio, a well-managed lease expiry profile, and a selective development program, positioning the Fund to mitigate risk and deliver strong returns. ONE CITY CENTRE, MISSISSAUGA, ON 2014 ANNUAL REPORT 17

20 INDEPENDENT AUDITOR S REPORT Deloitte LLP 360 Main Street Suite 2300 Winnipeg MB R3C 3Z3 Canada Tel: Fax: To the Contractholders of The Great-West Life Assurance Company - Canadian Real Estate Investment Fund No. 1 We have audited the accompanying financial statements of The Great-West Life Assurance Company - Canadian Real Estate Investment Fund No. 1, which comprise the statements of financial position as at December 31, 2014, December 31, 2013 and January 1, 2013, the statements of comprehensive income, statements of changes in assets attributable to contractholders and the statements of cash flows for the years ended December 31, 2014 and December 31, 2013, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of Part XII of the Canadian Life and Health Insurance Association Guideline G2, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of The Great-West Life Assurance Company - Canadian Real Estate Investment Fund No. 1, as at December 31, 2014, December 31, 2013 and January 1, 2013, and the results of operations and cash flows for the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards and the requirements of Part XII of the Canadian Life and Health Insurance Association Guideline G2. Chartered Accountants Winnipeg, Manitoba March 26, CANADIAN REAL ESTATE INVESTMENT FUND NO.1